Audio 3:29
Business investment outlook suggests slowing economy ahead

Michael JandaUpdated
Thu Aug 29 20:21:00 EST 2013

Business investment unexpectedly picked up slightly in the June quarter, but economists say the ABS survey shows firms are planning to cut their spending on new machinery, equipment and buildings next year. Analysts say the weak outlook means at least one more interest rate cut is likely, and whichever party wins next week's federal election is likely to face further pressure on already battered government revenues.

Transcript

MARK COLVIN: Australia's comedown from the mining boom may be gentler than many economists feared, but despite lower interest rates and a falling dollar, better than expected mining figures are offset by continued cutbacks in manufacturing and other industries.

Business reporter Michael Janda has more.

MICHAEL JANDA: The headline was positive - spending by business in the June quarter was up 4 per cent - much better than the flat result expected by most analysts.

SCOTT HASLEM: In the very near term it's good news, there's been a rebound in actual Capex and that supports the idea that the investment outlook is not collapsing but it is sort of flattening out here.

SCOTT HASLEM: But if we dig a little bit deeper we can see the intentions. The outlook for investment has clearly been downgraded and I'd argue downgraded more than people would have expected.

MICHAEL JANDA: The Bureau of Statistics figures show mining companies are currently planning to spend around 14 per cent less next financial year than this one.

Manufacturers are planning to invest 25 per cent less and other industries such as the services sector plan to spend a little bit less as well. RBC economist Michael Turner says that paints a gloomy outlook.

MICHAEL TURNER: I guess we're probably moving from something like a two speed economy to a one speed economy really, and that speed is somewhere below trend.

MICHAEL JANDA: And he says that below average growth rate is likely to persist for some time.

MICHAEL TURNER: We've experienced a large build-up in the mining sector over the last few years, and that will bear fruition in terms of exports and production in the next couple, but the remainder of the economy is still as yet unwilling or unable to pick up that much of the slack.

So, we're looking at something like below trend growth and in particular slightly soggy domestic demand over the next couple of years at least.

MICHAEL JANDA: ANZ economist Dylan Eades agrees that the drop off in mining investment is no longer the biggest concern.

DYLAN EADES: The real concern for us is the fact that the non-mining sectors of the economy don't really seem to be responding either lower interest rates or the lower Australia dollar, and I think that suggests that the rebalancing of growth that the RBA is looking for from the mining to non-mining sectors of the economy is perhaps taking a little bit longer than what they were hoping for.

MICHAEL JANDA: Do you think that means they will also have to do a little bit more than they have done so far?

DYLAN EADES: Yeah I think that the RBA will probably reduce interest rates once more this year, I think we still have October pencilled in.

MICHAEL JANDA: Lower interest rates used to be good politics, but voters are generally aware that rate cuts also usually mean the economy is slowing. And Michael Turner says next week's economic growth figures, out just days before the election, are likely to confirm that slow-down.

MICHAEL TURNER: We're looking at GDP growth around 2 and a half per cent year on year and it depends on how you want to spin that. Relative to what we've been used to for the past few years, it's not that strong. Relative to the rest of the world, it doesn't look too bad.MICHAEL JANDA: The bad news for whichever party wins next week's election is that the cut-backs in company's future expenditure plans mean that economic growth, and therefore government revenues, are expected to remain below par for much of the next term of government.

ANZ's Dylan Eades again.

DYLAN EADES: I think at the moment you very much have a situation in which business profits as well as government revenues are being squeezed at the moment by the decline in the terms of trade.

You certainly have a situation in which mining investment is going to contract over the next couple of years and activity in the non-mining sector at the moment still remains quite sluggish.

MICHAEL JANDA: While both parties are desperate to win, economically, this might not be a bad election to lose.